Cost Segregation and Bonus Depreciation: The Perfect Partnership
Cost segregation is a powerful tax strategy that allows property owners to reclassify parts of their real estate into shorter depreciation schedules. This enables accelerated tax deductions, providing immediate financial benefits. When combined with bonus depreciation, the savings are amplified, making it a game-changing tool for short-term rental investors.
For example, in a this case study, the owners of Chalet conducted a cost segregation study on their short-term rental property. By breaking down their property into its individual components, they identified significant portions eligible for shorter depreciation schedules. Paired with bonus depreciation, they saved $36,000 in taxes in a single year, freeing up capital for reinvestment and operational improvements.
Another case study, as shared in this article, explores another investor’s journey with cost segregation. After acquiring a short-term rental property, the investor used a cost segregation study to unlock $50,000 in first-year tax deductions. By reclassifying elements like furnishings, appliances, and certain outdoor amenities, they were able to enhance their cash flow and significantly reduce their taxable income.
The Impact of Potential Legislative Changes
If Congress extends the phase out or even reinstates 100% bonus depreciation, the benefits for short-term rental investors could include:
- Immediate Cash Flow Gains: Accelerated depreciation schedules combined with bonus depreciation would allow property owners to expense qualifying costs upfront, maximizing liquidity.
- Enhanced Return on Investment (ROI): Tax savings from cost segregation studies would directly increase profitability, particularly for investors managing multiple properties.
- Flexibility for New and Existing Properties: The combined benefits of cost segregation and bonus depreciation apply not only to new acquisitions but also to renovations and retroactive studies, as outlined in our look-back cost segregation guide.
The Unique Benefits for Short-Term Rentals
Short-term rental properties often involve frequent upgrades and asset turnover, making them particularly well-suited for cost segregation and bonus depreciation strategies. Items such as kitchen appliances, furniture, and landscaping improvements can often qualify for shorter depreciation schedules, allowing for greater immediate tax savings.
In addition, short-term rental investors can capitalize on retroactive cost segregation studies to claim missed benefits from previous years. This strategy, as detailed in our look-back guide, can provide a substantial financial boost, unlocking past savings that many investors overlook.
Prepare for the Future
With the election of President Donald Trump and a Republican-controlled Congress, there is potential for legislative changes affecting bonus depreciation. The administration has expressed interest in extending or reinstating 100% bonus depreciation to stimulate business investment. However, specific details regarding whether the phase-out will be extended or completely abandoned have not been finalized. The outcome will depend on legislative negotiations and the administration’s policy priorities.
These potential changes represent a pivotal moment for short-term rental investors. By combining this incentive with a cost segregation study, property owners can maximize tax savings, improve cash flow, and achieve their investment goals more quickly.
If you’re considering cost segregation or want to ensure you’re prepared to leverage potential legislative changes, connect with Chalet today. Our team of experts can guide you through the process, offering tailored strategies that unlock the full potential of your investments.
The time to act is now. With changes on the horizon, short-term rental investors have an unprecedented opportunity to harness the benefits of cost segregation and bonus depreciation. Take charge of your financial future and make the most of your investments. For investors or businesses that have already conducted cost segregation studies and utilized bonus depreciation, the benefits realized under previous laws remain intact.
